The value of all residential real estate worldwide is approximately $200 trillion. Of this, the U.S. accounts for approximately 23%. Every year, transaction volume in the U.S. exceeds $1.5 trillion. The numbers are staggering so it is no surprise that residential proptech is a heady market, capturing the imagination of entrepreneurs and institutions alike.
I’ve been involved in this area for about eight years and have the pleasure of advising several leading companies. As a marketer by profession, I tend to put these companies into categories to create a narrative and to develop brand specificity. In my framework, there are three broad buckets:
- Making purchase possible/financing
- Transaction and process improvements
- Post-purchase maintenance and value management
We can quibble on the words, but the spirit is clear.
Of these, category 2 is the most established. There are hundreds of companies that help with various parts of the transaction and process “supply chain,” from search and valuation to closing, from appraisal to title, from targeting to closing. Some companies in this space are better than others, but overall, the industry can give itself at least an A- in this category.
Category 3 is somewhat established. There are dozens of companies in this space, many of which are focused on helping existing homeowners extract cash from or make improvements to their houses. Very few are focused on maintenance and “preventative health,” but for the most part this category earns a B or B+.
Category 1 is a different beast. Like the Roman god Janus, it has two faces. On the one hand, finance in general is a very well-established category with data-driven rules and clear processes. Yes, it is plagued by bias — both historical and present — but it is a known quantity.
On the other hand, traditional finance has absolutely failed to expand homeownership, which continues to hover in the 63-65% range with enormous discrepancies when cut by race and class. This area is a failure of proptech, abject to be sure.
Why is this the case? Intransigent capital is the clear answer and the usual suspect.
Economic nostrums abound and are constantly diluted by mindless repetition. Principal among these are:
- Invested capital “requires” the highest return.
- Investors’ No. 1 job is to optimize shareholder value.
- Markets equilibrate risk and reward via the pricing mechanism.
For many, these ideas seem normative and obvious. But they all lead us into economic myopia and societal spirals.
There is no pre-ordained “rule” for capital that suggests its owners must be as extractive as possible. If that were the case, the government itself could charge individuals and institutions a usurious amount for loans or for the creation of infrastructure. If that were the case, parents who front money to children for home purchases would do so at high interest rates. People can make different decisions.
Shareholder value optimization is a mantra that serves to do little other than to glorify often brutal austerity. Over the long term, reducing the short-term return while creating profoundly larger and newer markets can be a very good decision. In addition, in the case of housing the externalities related to lack of homeownership militate against the commonweal.
Finally, anyone who thinks that pricing is really the result of a fine-grained process and not fetishism refuses to see the evidence from the decades of claptrap called modern economics.
So, with housing, what are some ideas for proptech entrepreneurs?
I am offering three ideas below but invite HousingWire readers to add more. I am humble enough to understand that the audience for this piece is far more capable than I am in developing ideas and creating value.
Three ideas to combat intransigent capital:
- Assist small builders in rapidly creating more housing units (potentially built offsite) to level prices and boost inventory.
- Optimize technology to create innovative financing options for first-time housing buyers at lower rates and prices, sacrificing per-unit economics for volume and community-building.
- Develop “community pools” and shared equity models to break the dependence on intransigent and predatory financial institutions.
The job is not easy, but the impact is enormous. Proptech’s big miss must be rectified, or the market is frankly just more of the same.
Romi Mahajan is the CEO of ExoFusion and president of KKM Group.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the author of this story:
Romi Mahajan at [email protected]
To contact the editor responsible for this story:
Sarah Wheeler at [email protected]